Netgear 2008 Annual Report Download - page 37

Table of Contents
received; otherwise, it is recorded as a reduction of revenues. Our estimated provisions for sales incentives can vary from actual results and we
may have to record additional expenses or additional revenue reductions dependent on the classification of the sales incentive.
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required
payments. We regularly perform credit evaluations of our customers’ financial condition and consider factors such as historical experience,
credit quality, age of the accounts receivable balances, and geographic or country-specific risks and economic conditions that may affect a
customer’s ability to pay. The allowance for doubtful accounts is reviewed monthly and adjusted if necessary based on our assessments of our
customers’ ability to pay. If the financial condition of our customers should deteriorate or if actual defaults are higher than our historical
experience, additional allowances may be required, which could have an adverse impact on operating expenses.
Valuation of Inventory
We value our inventory at the lower of cost or market, cost being determined using the first-in, first-out method. We continually assess the
value of our inventory and will periodically write down its value for estimated excess and obsolete inventory based upon assumptions about
future demand and market conditions. On a quarterly basis, we review inventory quantities on hand and on order under non-cancelable purchase
commitments, including consignment inventory, in comparison to our estimated forecast of product demand for the next nine months to
determine what inventory, if any, are not saleable. Our analysis is based on the demand forecast but takes into account market conditions,
product development plans, product life expectancy and other factors. Based on this analysis, we write down the affected inventory value for
estimated excess and obsolescence charges. At the point of loss recognition, a new, lower cost basis for that inventory is established, and
subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. As demonstrated
during prior years, demand for our products can fluctuate significantly. If actual demand is lower than our forecasted demand and we fail to
reduce our manufacturing accordingly, we could be required to write down additional inventory, which would have a negative effect on our
gross profit.
Goodwill and intangibles
We apply SFAS No. 142, “Goodwill and Other Intangible Assets” and perform an annual goodwill impairment test. Should certain events
or indicators of impairment occur between annual impairment tests, we will perform the impairment test as those events or indicators occur. For
purposes of impairment testing, we have determined that we have only one reporting unit.
The goodwill impairment test involves a two-step process. In the first step, we estimate our fair value and compare the fair value with the
carrying value of our net assets. If the fair value is greater than the carrying value of our net assets, then no impairment results. If the fair value is
less than our carrying value, then we would perform the second step and determine the fair value of the goodwill. In this second step, the amount
of impairment is determined by comparing the implied fair value to the carrying value of the goodwill in the same manner as if we were being
acquired in a business combination. Specifically, we would allocate the fair value to all of our assets and liabilities, including any unrecognized
intangible assets, in a hypothetical analysis that would calculate the implied fair value of goodwill. If the implied fair value of goodwill is less
than the recorded goodwill, an impairment charge would be recorded to earnings in the Consolidated Statements of Operations.
In addition, we would evaluate goodwill for impairment if events or circumstances change between annual tests indicating a possible
impairment. Examples of such events or circumstances include the following: a significant decline in our expected future cash flows; a sustained,
significant decline in our stock price and market capitalization; a significant adverse change in the business climate; the testing for recoverability
of a significant asset group; and slower growth rates.
In the fourth quarter of fiscal 2008, we completed the annual impairment test of goodwill. Our fair value was determined using a
combination of the income approach and the market approach. Under the market
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